January 24, 2011
Europe is loading its bazooka. The military image was invoked by Henry Paulson, former US Treasury secretary, to describe his troubled asset relief programme. Tarp started out as a vehicle for buying toxic assets from US banks. It became something else entirely: a mechanism for recapitalising those banks. The European financial stability facility needs an equally drastic makeover to make it a more effective force in ending the eurozone’s sovereign debt crisis.
The EFSF launches its first bond issue on Tuesday – up to €5bn for Ireland’s rescue package. That is part of its mission to provide liquidity to countries frozen out of the capital markets. Though its headline size is €440bn, its lending capacity is only about €255bn because of creditworthiness constraints. The facility can fund Ireland, Greece, and probably Portugal should it seek external assistance. But even this would be a stretch; bail-outs are multiyear packages, after all.